Yglesias has a very good article on why passenger rail is not a bigger deal in the US. In it, he says this (emphasis added):

Instead the issue is that the dismal failure of US passenger rail is in large part the flip side of the success of US freight rail. America's railroads ship a dramatically larger share of total goods than their European peers. And this is no coincidence. Outside of the Northeast Corridor, the railroad infrastructure is generally owned by freight companies — Amtrak is just piggybacking on the spare capacity.

It is a short article, so it does not go into more depth than this, but I have actually gone further than this and argued that the US freight-dominated rail system is actually far greener and more sensible than the European passenger system. As I wrote years ago at Forbes:

The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital. It is operated privately, and runs without taxpayer subsidies. And, it is by far the greatest rail system in the world. It has by far the cheapest rates in the world (1/2 of China’s, 1/8 of Germany’s). But here is the real key: it is almost all freight.

As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world. Europe and Japan are not even close. Specifically, about 40% of US freight moves by rail, vs. just 10% or so in Europe and less than 5% in Japan. As a result, far more of European and Japanese freight jams up the highways in trucks than in the United States. For example, the percentage of freight that hits the roads in Japan is nearly double that of the US.

You see, passenger rail is sexy and pretty and visible. You can build grand stations and entertain visiting dignitaries on your high-speed trains. This is why statist governments have invested so much in passenger rail — not to be more efficient, but to awe their citizens and foreign observers.

But there is little efficiency improvement in moving passengers by rail vs. other modes. Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars. Trains have to be really, really full all the time to make for a net energy savings for high-speed rail vs. cars or even planes, and they seldom are full. I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel — especially nice because my son and I had the rail car entirely to ourselves both ways.

The real rail efficiency comes from moving freight. As compared to passenger rail, more of the total energy budget is used moving the actual freight rather than the cars themselves. Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail. One reason for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.

Freight is boring and un-sexy. Its not a government function in the US. So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails. ....

I would argue that the US has the world’s largest commitment to rail where it really matters. But that is what private actors do, make investments that actually make sense rather than just gain one prestige (anyone know the most recent company Warren Buffet has bought?) The greens should be demanding that the world emulate us, rather than the other way around. But the lure of shiny bullet trains and grand passenger concourses will always cause some intellectuals to swoon.

Which would you rather pounding down the highway, more people on vacation or more big trucks moving freight? Without having made an explicit top-down choice at all, the US has taken the better approach.

Yesterday, I received a letter from Applied Underwriters (Letter here (pdf)) demanding that I take down the Yelp review and my blog post or else they will sue me for libel. Based on my understanding of libel law, the content of my posts (which are all legally protected opinion), and recent court cases, Applied Underwriters has essentially no chance of ever winning such a suit. But my guess is that this is not their intention. I presume they are hoping that the fear of legal action, and the expense of legal defense, will cause me to stop my perfectly valid public criticism of their product.

I am seeking legal advice from a well-known First Amendment attorney, so Applied Underwriters will get my final response after I have had advice of counsel. But here are a few thoughts:

You can read the attorney's letter in full if you are a fan of such things, but if you read sites like Popehat much, you can pretty much predict what you will see.

The gist of their complaint, from the only paragraph of mine quoted in the letter, seems to be the word "scam". By the text of their letter, they seem to believe that "scam" is libelous because their company is well-rated financially and that they provide reasonable claims service. I concede both these facts. However, I called it a "scam" because there is a big undisclosed cost to their product that was never mentioned in the sales process, and that could only be recognized by its omission in the contract I signed -- that there is nothing in the contract committing them to any time-frame under which to return deposits and excess premiums I have paid, which may well amount to hundreds of thousands of dollars. This fact about the contract is confirmed by their customer service staff, who have said further that the typical time-frame to return such over-collections and deposits is 3-7 years after the contract ends, or at least 6-10 years after the first of the deposits was made.

If I had gotten any descriptions of their service terms wrong, I would have been happy to correct them. Hell, given that apparently Applied Underwriters will hold over $200,000 of my money for as many as ten years before they maybe return it to me, I am hoping I somehow have misunderstood. Unfortunately, their staff is pretty adamant that I understand these terms perfectly, and you will see that the letter sent by the attorneys does not attempt to refute any of the specific issues that drive my negative review. And of course none of this was ever disclosed in the sales process. The company attorneys point to the fact that I read the agreement and signed that I understood, but in fact this issue is only in the agreement by its omission. In its 10 pages of arcane boilerplate, the agreement never includes any clause giving them any legal obligation to return your deposits and excess premiums in an defined timeframe. It is that omission that I missed. Would you have caught it? Is this a substantial enough issue that you would expect disclosure in the sales process?

So is this a "scam"? I believe that this issue is costly enough, and hard enough to detect, and far enough outside of expected business practices to be called such. You may have your own opinion, but ask yourself -- When you enter into, say, a lease and have to put down a security deposit, is it your reasonable expectation that the landlord has the right in your lease to keep your deposit for 3-7 years (or more) after you move out? Oh, and by the way, how might your evaluation of something as a "scam" be affected by the knowledge that the company is threatening to sue anyone who writes a negative review?

Anyway, I take responsibility for my own failure as a consumer here. But in a free society it is perfectly reasonable to communicate issues one has with a product or service to help others avoid similar mistakes. Which is what I have done.

** I have problems with Yelp as well. What is linked is not my original review. My original review linked to my blog post. Yelp took it down. I will tell that saga in a future post.

Update 2/1/2016: I will not comment further at the moment on Applied Underwriters as they are currently suing me to have this article below removed. So you will need to look elsewhere for news on AU, of which there appears to be plenty. For example, here and here. The State of California Insurance Commission, via an Administrative Law Judge's decision, has ruled on the legality of the AU product discussed below. That ruling (pdf) can be downloaded here. I would love to comment on it but I will have to leave the evaluation to you. If you can't read the whole thing pages 33 and 34 are worth your time, as well as the conclusions that begin on page 59.

Well, I have managed to get myself into a scam. It is not your normal scam, like the ones that are run by some mafia boiler room with guys working under aliases. This scam comes via a major insurance company called Applied Underwriters (working under the names California Insurance Company and Continental Indemnity Company) which is owned by Berkshire Hathaway and none other than Warren Buffett. If you feel sorry for Warren Buffett and want to give him a large interest-free loan for an indeterminate number of years, this is your program.

Update 4/16: Let me insert here that Applied Underwriters has sent me a letter threatening a libel suit if I do not take down this post and a parallel review at Yelp. AU Takedown demand here (pdf). The gist of the matter seems to be the word "scam". By the text of their letter, they seem to believe that "scam" is libelous because their company is well-rated financially and that they provide reasonable claims service. I concede both these facts. However, I called it a "scam" because there is a big undisclosed cost to their product that was never mentioned in the sales process, and that could only be recognized by its omission in the contract I signed -- that there is nothing in the contract committing them to any time-frame under which to return deposits and excess premiums I have paid, which may well amount to hundreds of thousands of dollars. This fact about the contract is confirmed by their customer service staff, who have said further that the typical time-frame to return such over-collections and deposits is 3-7 years after the contract ends, or at least 6-10 years after the first of the deposits was made.

So is this a "scam"? I believe that this issue is costly enough, and hard enough to detect, and far enough outside of expected business practices to be called such. You may have your own opinion, but ask yourself -- When you enter into, say, a lease and have to put down a security deposit, is it your reasonable expectation that the landlord has the right in your lease to keep your deposit for 3-7 years (or more) after you move out? /Update

Anyway, let's take a step back and look at this in detail.

First, I need to give a bit of background on how workers comp works. When you are a new company, they assign you an experience rating -- that is a multiplier of your premium based on past loss experience. There is some default starting number that if I remember right, in most states, is a bit over 1.0x. Each year, the workers comp world looks back at your past history and computes a new loss rating -- higher if you have had more payouts, lower if not. Generally it is based on three years experience not counting the last year (so 2-4 years in the past). Your future premiums get multiplied by this loss rating.

Several years ago we had a couple bad injuries that drove our loss number into the 1.7-1.9x area. Neither were really due to a bad safety issue, but both involved workers in their seventies where a minor initial injury led to all sorts of complications. Anyway, my agent at the time calls me one day a couple of weeks before renewal and says that none of the major companies will renew me. This seemed odd to me -- I understood that my recent claims history was not good, but isn't that what the premium multiplier was for? In fact, if my loss history returned to normal, they would make a fortune as I paid high rates based on old losses but had fewer new ones.

Apparently, though, insurance companies have fixed rules that keep them from underwriting higher loss ratings. Probably for the same reason Vegas won't take action on Ivy League football games any more -- just too much variability. I found out later with my new broker we could probably have overcome this, but I learned that too late.

My broker at the time put me into a 3-year program from Applied Underwriters, in part because they were taking everybody. This program was set up differently from most workers comp programs. You had a basic policy, but there was a second (almost indecipherable to laymen) reinsurance agreement that adjusted the rates of the basic policy based on you actual claims. Here is the agreement (pdf) In other words, based on your claims, they would figure up at the end how much you owed and what your premium multiplier would be.

I saw two red flags that I ignored in signing up. 1) The reinsurance agreement was impossible to understand, violating one of my foundational rules that I shouldn't sign things I don't understand. And 2) The rate structure was very suspicious. They touted a rate structure that could go as low as, say, $100,000 a year and was capped around $400,000 a year. But when you pulled out a calculator, the $100,000 was virtually unobtainable. It would require about zero claims. If there were any claims at all, even for a few bandaids, the price would march up to $400,000 really fast. It was the equivalent of a credit card teaser rate, and it should have made me suspicious.

Anyway, I was desperate. For a business like mine, being told I had no workers comp insurance just a few weeks before the old policy ran out was a death sentence. No one would write me or even quote me a policy that fast. So I took the Applied Underwriters offer. Shame on me, I should have worked on this much harder.

I won't bore you further with my voyage of discovery in trying to figure out how this thing works. I will just tell you the results that I have found. There are apparently other companies with similar issues, one of which is documented here: Applied Underwriter Suit (pdf)Newsletter publisher objected to scan of article, so I have taken it down at their request. Here is a link to roughly the same article.

I spent hours and hours trying to figure out AU's statements. There is a whole set of terminology to learn that is actually not used in most of the rest of the workers comp world. The key page of the statement is page 7, which I will show below because it highlights several of the issues with Applied. Page 7 is the page where the monthly premium is "calculated". I have added the red numbers and arrows for the discussion below.

Here are some of the Applied Underwriter problems:

Large deposits that must be made each year and may never be returned. You can see that I am making deposits over $40,000 a year. And that is each year. The first year deposit is not returned. The second year and third year are just added to it. And I have found out since I joined this program that they are not contractually obligated to return them in any time frame. Maybe some guy who was hurt in his thirties has a relapse and claims more money when he is 75. Gotta keep your deposit just in case, don't we? The timing of the return of your deposits (and overpaid premiums below) is entirely at their discretion, and that has been confirmed by their customer service staff. In fact, their standard answer is that on average, such monies are not returned to customers for 3-7 years after the contract ends, or at least 6-10 years after the first deposits were made.

Premiums based on the worst of your experience and their estimate of your losses, and they keep the difference for years and years. For those in the same trap as me, I will try to explain the numbers above. The estimated loss pick containment at the top is basically their estimate of your losses. Note that it drives every number on the page and is basically their arbitrary number -- they could have set it anywhere. The loss pick containment to date is just pro rated for the amount of the year that has gone by. The 65% is an arbitrary number. The $25,278 is my actual losses to date. You can see where I point with #2 above, though, that my losses are irrelevant to my premiums. They take the higher of my losses and what is essentially their estimate of my losses and I pay based on that. Note that their higher number is not based on the reserved amounts on actual claims -- the $25,278 includes their reserves. It is just the number they established at the beginning of my policy they think my claims are going to be and gosh darnit they are going to stick to that (and my claims even in my worst year in history were never even half of their estimate). Yes, at the end of the policy if my losses stay low, they owe me money back for all the premium they overcharged me based on their arbitrarily high estimates. But see #1 above -- there is no time horizon under which they have to return the money. They can keep it for years and years.

The final premium is, after all these calculations, entirely arbitrary. So after this loss calculation (which essentially just defaults to their arbitrarily high estimate and not my actual loss history) they do some premium calculations. These actually sort of make sense if you stare at the agreements for a really long time. But then we get to the line I point to in red labelled 3. It is the actual amount I owe. But it does not foot to any other number on the page. How do they come up with this? They won't say. To anyone. It might as well be arbitrary. I actually had some dead time and took all my reports and tried to regress to a formula they use for this, but I couldn't figure it out. So all the calculation on this page is just a sham, it's the mechanical wizard in the Wizard of Oz. It looks good, but does not actually directly lead to what you are billed.

So I thought I understood my problems. I put in large deposits and overpaid premiums based on arbitrarily high loss estimates they make -- all of which will take me years and years of effort to maybe get back. It turns out that I likely will have a third problem. In the lawsuit linked above, the plaintiff complains that when they left the program after three years, Applied arbitrarily wrote up all their estimated losses on open claims to stratospheric levels and then demanded a large final premium payment at the end. Folks on Yelp complain of the same thing. You should know how this works by now -- the plaintiff will theoretically get all this back someday, maybe, when the claims prove to be less costly, but in the mean time Warren Buffet gets to invest the money for years and years (cost of capital = 0) until it is returned.

This is why I think Applied Underwriters actually likes companies with high lost histories. Rather than costs, losses for them are excuses to over-collect on deposits and premiums -- money that can then be invested and held for years free of charge.

As an aside, I want to thank my new agents at Interwest Insurance for helping decipher all of this. They actually flew a guy in to help me understand this policy. They didn't get me into it, but they are helping me pick up the pieces as best we can.

...government access. Clearly Warren Buffet saw the writing on the wall in 2009, that the way to make money in the US was no longer to build products and factories but to invest in lobbying to get crony advantages and giveaways.

This Administration and Senate makes all kinds of progressive noises, but all the while they are running perhaps the greatest expansion of cronyism in US history. And the smart money knows it.

What is it about intellectuals that seem to, generation after generation, fall in love with totalitarian regimes because of their grand and triumphal projects? Whether it was the trains running on time in Italy, or the Moscow subways, or now high-speed rail lines in China, western dupes constantly fall for the lure of the great pyramid without seeing the diversion of resources and loss of liberty that went into building it. First it was Thomas Friedman, and now its Joel Epstein in the Huffpo, eulogizing China. These are the same folks who tried, disastrously, to emulate Mussolini's "forward-thinking" economic regime in the National Industrial Recovery Act. These are the same folks who wanted to emulate MITI's management of the Japanese economy (which drove them right into a 20-year recession). These are the same folks who oohed and ahhed over the multi-billion dollar Beijing Olympics venues while ignoring the air that was unbreathable. These are the same folks who actually believed the one Cuban health clinic in Sicko actually represented the standard of care received by average citizens. To outsiders, the costs of these triumphal programs are often not visible, at least not until years or decades later when the rubes have moved on to new man crushes.

Epstein, like Friedman, seems to think that the US is somehow being left behind by China because its government builds much more stuff. We are "asleep." Well, I have a big clue for him. Most of the great progress in this country was built when the government was asleep. The railroads, the steel industry, the auto industry, the computer industry - all were built by individuals when the government was at best uninvolved and at worst fighting their progress at every step.

Epstein in particular thinks we need to build more trains. This is exactly the kind of gauzy non-fact-based wishful thinking that makes me extremely pleased that Epstein in fact does not have the dictatorial powers he longs for. High speed rail is a terrible investment, a black hole for pouring away money, that has little net impact on efficiency or pollution. But rail is a powerful example because it demonstrates exactly how this bias for high-profile triumphal projects causes people to miss the obvious.

Which is this: The US rail system, unlike nearly every other system in the world, was built (mostly) by private individuals with private capital. It is operated privately, and runs without taxpayer subsidies. And, it is by far the greatest rail system in the world. It has by far the cheapest rates in the world (1/2 of China's, 1/8 of Germany's). But here is the real key: it is almost all freight.

As a percentage, far more freight moves in the US by rail (vs. truck) than almost any other country in the world. Europe is not even close.

You see, passenger rail is sexy and pretty and visible. You can build grand stations and entertain visiting dignitaries on your high-speed trains. This is why statist governments have invested so much in passenger rail -- not to be more efficient, but to awe their citizens and foreign observers.

But there is little efficiency improvement in moving passengers by rail vs. other modes. Most of the energy consumed goes into hauling not the passengers themselves, but the weight of increasingly plush rail cars. Trains have to be really, really full all the time to make an energy savings for high-speed rail vs. cars or even planes, and they seldom are full. I had a lovely trip on the high speed rail last summer between London and Paris and back through the Chunnel -- especially nice because my son and I had the rail car entirely to ourselves both ways.

The real efficiency comes from moving freight. More of the total energy budget is used moving the actual freight rather than the cars themselves. Freight is far more efficient to move by rail than by road, but only the US moves a substantial amount of its freight by rail. One reasons for this is that freight and high-speed passenger traffic have a variety of problems sharing the same rails, so systems that are optimized for one tend to struggle serving the other.

Freight is boring and un-sexy. Its not a government function in the US. So intellectuals tend to ignore it, even though it is the far more important, from and energy and environmental standpoint, portion of transport to put on the rails. In fact, the US would actually probably have even a higher rail modal percentage if the US government had not enforced a regulatory regime (until the Staggers Act) that favored trucks over rail. If the government really had been asleep the last century, we would be further along.

The US has not been "asleep" -- at least the private individuals who drive progress have not. We have had huge revolutions in transportation over the last decades during the same period that European nations were sinking billions of dollars into pretty high-speed passenger rails systems for wealthy business travelers. One such revolution has been containerization, invented here in the US and quickly spreading around the world. Containerization has revolutionized shipping, speeding schedules and reducing costs (and all the while every improvement step was fought by the US and certain local governments). To the extent American businesses are not investing today, it has more to do with regime uncertainty, not knowing what new taxes or restrictions are coming next from Congress, than any lack of vision.

I would argue that the US has the world's largest commitment to rail where it really matters. But that is what private actors do, make investments that actually make sense rather than just gain one prestige (anyone know the most recent company Warren Buffet has bought?) The greens should be demanding that the world emulate us, rather than the other way around. But the lure of shiny bullet trains and grand passenger concourses will always cause folks like Epstein to swoon.

Update #2: The author Joel Epstein emailed me a response to this post. I will give it to you in its entirety: "You should get out of the country more often." Wow, he played the provincial American card on me. Except that I have been to about 20 countries, from Singapore to Argentina to Hungary. Besides, I really don't understand what the hell he means by this in the context of my post, except as a bid for some sort of intellectual superiority. Anyone else understand?

Postscript

Boring, but environmentally friendly and cost-effective:

Sexy, but environmentally useless (at best) and tremendously costly:

So, explain to me what drives these guys investment thinking. Can it be anything but triumphalism?

I usually don't have much to say about Oprah. I guess my perception of her has always been vaguely negative -- she's given a big leg up to some junk science causes in the past, and some of her recent attempts at charity have seemed to be more about self-promotion than about really helping people (the car giveaway comes to mind). My real beef with her is probably more petty: She once inspired my wife, in that way only Oprah seems to be able to do with women, to organize her closets just like Oprah. What this meant in practice was that I had to go out and buy about 400 matching wooden hangers, and then we had to get rid of all the stuff on our shelves. Yes, you heard that right:

Wife: All that stuff cluttering up the shelves in our closet has to goMe: Why? I mean, it's a closet. It's for storing stuffW: It has to go somewhere elseM: There is no place elseW: Oprah's closet is beautiful - it has just clothes and nothing else in it. That's the way our closet should beM: But we have no where else to store this stuff. Why should that shelf sit empty when we have a use for it?W: Because it will look greatM: Who cares? It's a closet. Besides, are we really going to take home decorating advice from a woman who has enough money to build a dedicated closet for each pair of shoes she owns?

Anyway, guys out there, you probably know the drill.

But I must say my opinion is changing a bit. I was deprecating about her book club, because of some of the specific book choices, until I saw the stat that something like half the adults in this country never read a book again after they leave school. If Oprah can get women as fired up about reading as my wife is about having a zen closet, power to her.

And, I have to defend her in her current endeavor, where she is giving $40 million to start a school for girls in Africa. Good. I don't know if it will work, but it is worth a try. We know that giving direct aid into kleptocratic totalitarian African governments is worse than useless, so maybe education is an answer.

Amazingly, she is under fire for this program, as people across the political spectrum ask why she is giving this money to Africa when everything is not perfect in this country. This argument strikes me as more Lou Dobbs-type nationalistic xenophobia. Sure inner city schools in this country suck, but they are better than what is in Africa (nothing) and its not clear that money alone is going to fix government-run schools (besides, Bill Gates and Warren Buffet are already taking a swing at that). I personally would love to contribute to inner-city education, but until there is a framework such that someone other than the government controls the schools, I am not going to do it.

There is no reason why Africans are less deserving of charity than Americans, and several reasons why they may be more deserving. Recognize that most blacks in this country, even those in the inner-city, would be in the top quintile of wealth in Africa. So good for Oprah.

Update:Andrew Coulson of Cato argues that Oprah misdiagnoses the inner city education problem - its not the kids, its the schools. I would argue its both. School choice gives kids a chance to attend a better, more stimulating school. But it also acts as a sorting process, separating kids and parents who want a good education and getting them away from the cancer of kids that don't. I think Oprah (and Bill Cosby before her) correctly diagnoses that there is certainly a depressing number in the latter category. However, all that is peripheral. Oprah does not owe her charity to the US. Africa is a perfectly reasonable target for her charity (and why does Oprah catch crap for focusing on Africa when no one gives Bono similar grief?)